Why Most People Won’t Feel Better Off In 2018

29 Dec 2017 | 11.32 am

Why Most People Won’t Feel Better Off In 2018

ESRI analyses Budget 2018 tax and welfare measures

29 Dec 2017 | 11.32 am

The tax and welfare measures in Budget 2018 will leave people worse off next year due to strong wage growth. That’s the conclusion of the ESRI, the state-funded economic think tank, in its Q4 Commentary.

ESRI has analysed the impact of the tax and welfare changes introduced in Budget 2018 measured against a distributionally neutral benchmark, i.e. a budget which would index the money value of tax credits and welfare payment rates in line with expected growth in wages of about 3.1%.

The measures in Budget 2018 fall short of this ‘benchmark’ and will thus reduce incomes below the levels which would have obtained if tax and welfare parameters were indexed in line with wage growth.

Download ESRI’s Economic Forecast For 2018

The average shortfall for all households will be 0.4%, but the loss will be greatest for low-income families and least for high-income earners — 0.6% for the poorer, 0.2% for the well-off. The 0.6% loss also applies to retired couples and to families which include people not in the workforce, such as the disabled, the ill, and people in education.

The caveat surrounding the ESRI analysis is the assumption of  average wage growth of 3.1%  through 2018. That seems a stretch after average wage and salary inflation of 1.7% estimated for 2017.

ESRI claims its comparison with indexation is useful in determining the true distributional effect of a budget. The Irish practice has been to compare budget policy effects with a notional ‘opening budget’ which assumes tax rates, credits and welfare payments stay at their existing levels. “It may be useful for accounting purposes, but it gives a false picture of the distributional effects of a budget,” the Institute claims.

Adjustments to tax and welfare parameters were less than what full indexation (3.1%) would imply. For example, the standard rate band was widened by €750 but indexation would have required an increase of €1,050. Similarly, the Budget raised welfare payments by €5 per week, while indexation would have required an increase of €6, or for pensioners, €7.

 Full indexation of tax bands, credits and welfare payments would have cost about €1.1 billion. The allocation for personal taxes and welfare payments was about €400m less.

The notional ESRI ‘losses’ are small compared to the losses imposed by austerity budgets and the gains from budgets during the boom years. For example, Budget 2006 involved gains of 1.8%, averaged across households at all income levels, while Budgets 2009-2010 combined saw losses of over 5% for the highest income quintile.

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